Loews – Getting Parts Of The Business For Free

Loews (NYSE:L) is a holding company with an interesting assortment of holdings. Through its subsidiaries, it is engaged in commercial property and casualty insurance; operation of offshore oil and gas drilling rigs; transportation/storage of natural gas and natural gas liquids and gathering and processing of natural gas, and operation of a chain of hotels. The Company’s subsidiaries include CNA Financial Corporation (NYSE:CNA); Diamond Offshore Drilling, Inc. (NYSE:DO); Boardwalk Pipeline Partners, LP (BWP), and Loews Hotels Holding Corporation (Loews Hotels).

History

Loews was founded in 1946 when Laurence Tisch persuaded his parents to buy a hotel in Lakewood, N.J. The company built its first hotel in 1959 and later diversified its portfolio of businesses. Loews’ portfolio today consists of CNA financial which was acquired in 1974, Diamond Offshore in 1989, Boardwalk Pipeline in 2003, and Loews Hotels which has always been owned. The Tisch family continues to be involved with the company today. James Tisch is the CEO and Jonathan and Andrew Tisch are Co-Chairmen of the Board. 21% of the company is owned by Tisch family members. However, there is only one class of stock and all shareholders have equal voting rights.

Financial Overview

Share Repurchases

The management team has an impressive history of buying back stock. Every decade since 1970, Loews has bought back more than one quarter of the outstanding shares. Since 2010, they have bought back more than 18%. Just in the last three quarters, $750 million worth of stock has been bought. This equates to buying back about 5.7% of the outstanding shares.

Recent Financial Results

Over the last few years, Loews has not produced much revenue growth. CNA Financial and Loews Hotels have had revenue growth but that has been largely offset by the revenue shrinkage at Diamond Offshore and Boardwalk Pipeline. Even with the lack of revenue growth, L has been very profitable and shareholder friendly. Historically, they have been very disciplined and patient with a large cash pile. At the end of last quarter, they reported $4.8 billion in cash. In the last few quarters, we have started to see them increase the pace of their stock buyback. Management recently explained that it is frustrated by the discount the market has placed on their stock. They believe their stock is undervalued as well as the stocks in its portfolio. Management has chosen to allocate capital by buying back its own stock to take advantage of this “double discount.”

Portfolio Overview

CNA Financial

Commercial P&C insurer with industry leading specialty lines business

Focused on operating more effectively through using industry specific expertise to better understand risk and pricing

Accounts for 60% of Loews equity and 80% of its FCF today

Trades at a substantial discount to BV at 0.71 P/B

Continues to operate more effectively shown by decrease in loss and combined ratios

Diamond Offshore Drilling, Inc.

One of the largest offshore drilling companies in the world with five drillships, twenty four semisubmersible rigs, and six jack-up rigs.

All five drillships are contracted into 2019 and 2020 translating into $4.6 billion of contract backlog.

Strong balance sheet with additional $300 million credit line from Loews if needed.

Business has tailwind from replacement of coal-fired electrical power generation by natural gas generators

$1.6 billion in capital projects underway to serve growing demand

Loews Hotels

Owns and operates 23 hotels in the United States and Canada

Has shown solid growth by posting 12% same store revenue per available room (revPAR) from 2013 to 2014.

Grown adjusted EBITDA from $123 million in 2014 to an estimated $160 in 2015. Up 30%.

Focused on continuing to grow the Loews Regency brand after opening the Loews Regency San Francisco this year.

Loews Hotels often gets overlooked because it is the only part of the portfolio that isn’t publicly traded. Management doesn’t provide as much information about it. However, investors should be excited about its future. With only 23 hotels in the United States and Canada there is a lot of room to grow and compete.

Financials

When looking at the financials, the first thing worth noting is the massive discount on a price/book basis. The stock currently trades at only 0.65 price/book. This was surprising to me considering management has a 7% CAGR since taking office in 1998. It seems like the market might be unfairly punishing Loews because of the companies in its portfolio. Particularly Diamond Offshore and Boardwalk Pipeline. If you perform a relative valuation, comparing Loews to its historical 3 year valuations, it is clear that it is cheap today on a price/book basis. See the chart below.

The three year average price to book ratio is is 0.86 versus 0.65 today. A reversion back to the mean would indicate 30% upside in the stock.

A relative valuation is a decent way to look at the company but I think the best way to value it might be a sum of the parts (SOTP) analysis. A SOTP valuation will allow us to look at each part of the portfolio. This might help us draw a conclusion as to whether Loews is being overly discounted because of the companies in its portfolio.

The SOTP analysis clearly shows CNA’s driving effect on the total valuation of the company, as the difference between the bear and bull case is about $2.8 billion.

With a current enterprise value of ~$16.7 billion, the market is basically throwing in all of Diamond Offshore Drilling and part of Boardwalk Pipeline for free.